I frequently talk about how important it is for you to build up a professional network. Cultivate an Old Girls’ Club. Spend time and money to improve your career skills and connections. In fact, it’s kind of my “thing.”

The reason (I hope!) is pretty obvious: This community of people will help you grow your career, help you achieve your professional goals. This, in turn, turns into more and better opportunities, which turn into more and better money, which, done right, turns into financial strength, security, and choices.

Consider a client of mine, whom I’ll call Diana (shout out to Wonder Woman’s alter ego). She’s 26, and she works as a user design researcher at a startup in San Francisco. She makes $140,000/year.

She has many potential years (nay, decades) of work ahead of her if she follows the “traditional” schedule of retiring at 65. As such, anything she can do to increase her salary now will pay off for many many years.

I would absolutely recommend that she spend a few thousand dollars on increasing her job skills or improving her professional network instead of saving it for retirement (if, of course, she had to choose; if she can do both, bonus!). This increases her so-called “human capital,” a topic that fascinates me no end. I would also absolutely recommend that she negotiate with each new job offer (I think she’s already on her… third? job since college) and within each job.

That’s not earth-shattering. So let’s quantify the financial impact brought about by increasing her earning power. You know, with numbers and stuff.

Let’s say Diana, at the age of 26, spends some money this year to take a class or on conferences and networking events, and as a result of that, she boosts her income by $5000. Let’s further assume that the increase stays with her for the rest of her career. (Is that a reasonable assumption, that the $5000 salary increase will persist? I think it is: as much as we try to avoid it in negotiations, our previous salary is almost always a consideration in new jobs. Also, Simpler Math!)

How Much More Money Will I Have When I Retire?

Let’s walk through this first example:

Diana makes $5000 extra each year

Between the age of 26 and retirement at 65 (39 years of work)

Invests it at an 8% return

3% inflation

That’ll give her an extra $550,000, in today’s dollars, by retirement age. (Whoa!) Using the 4% rule (basically, you can withdraw 4% of your portfolio each year and not run out of money), that’s an extra $22,000 of income per year in retirement. (Second whoa!)

Alternatively, How Much Earlier Can I Have F-You Money?

Let’s look at it from a different perspective. We just answered the question “How much more money will I have at my oh-so-traditional retirement age of 65?” But what if we asked “How much earlier can I retire/become financially independent/have F-You money if I make and invest an extra $5000/year?”

Let’s look at this calculation for Diana:

She wants $80,000/year in retirement income.

Using the 4% rule, that means she needs $2M in retirement savings.

Saving $18,000/year will give her that $2M at retirement in 39 years, at age 65.

Instead she saves an extra $5000 on top of that, for a total of $23,000/year in retirement savings.

She’s now on track to retire in 35 years, instead of 39. That’s FOUR MORE YEARS in which Diana can make the decision “Do I want to work?” based on her own desires, not on financial necessity.

Lady, I’m 30. Can We Talk about Something Other than Retirement?

Retirement is the ultimate of financial goals because it’s the only one we all share, and it’s the only one that’s necessary. But it’s also a long, long way away for those of us in our 20s, 30s, or a still-fresh-and-lovely-almost-41.

This “many years removed from here” thing is problematic in two ways:

Estimates of any sort for 30+ years out are unlikely to be correct.

It’s really hard to meaningfully wrap your head around goals so far in the future. (This is probably why traditionally most people don’t seek out a financial planner until they’re 55 and realize, “Huh! I wonder if I can ever retire! ‘Cause, you know, I’d really like to.”)

So, with a nod to the importance of retirement, let’s evaluate another, closer goal: buying a home.

Let’s say:

You want to buy a home in 3 years

You save $5000/year

You keep it as cash, as 3 years is too short a time frame for you to invest your money

You’ll then have an extra $15,000 (actually, a little less if you account for inflation) in downpayment. That could help you in a couple ways:

You need a smaller mortgage (lower by $15,000) to buy the same home. Your downpayment is a larger % of the total purchase price, and so you get you better mortgage terms.

You can buy a more expensive home (get a bigger mortgage). If you’re going for the traditional 20% down, that extra $15,000 downpayment means you can buy a home that costs $75,000 more.

Many of my clients know that “eventually” they’d like to buy a home but have no idea when. If you want to buy a home some time in the next 10 years, then it’s reasonable to conservatively invest the downpayment.

You’ll end up with almost $31,000 more for your home (in today’s dollars…this might look strangely low, but it’s because inflation was almost as high as the rate of return). Now you’re in an even better situation than above, when you were building up only cash savings over fewer years.

You can really improve your mortgage terms, debt level, or the size of house you can afford with that extra $5000/year.

If You Remember Only One Thing (Okay, Two)

If you’re 26, or 35, it’s probably not worthwhile calculating your “number” for retirement. There is danger in projecting out that far in the future, as I mention above. But the implication is clear: if you manage to permanently raise your income, the long-term financial impact can be huge. Excuse me, YUGE.

It is very worthwhile thinking about the obvious and powerful relationship that increased earnings→increased savings→earlier, easier, or wealthier retirement or other goals.

I’m hoping you noticed one key assumption in all this discussion: that you save that extra $5000 each year. Getting paid more won’t change your financial situation in the least if you spend it all. So, this whole dynamic requires both. You have to have the extra money to save, and then you have to actually save it. Don’t “inflate” your lifestyle to use up all your extra money (and suffer on the “hedonic treadmill”). Lifestyle inflation can kill your financial plans.

Question: What are you doing to increase your earning power?You can leave a comment below.

Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Meg Bartelt, and all rights are reserved. Read the full Disclaimer.

2 Comments

Erin Says

Meg Says

06 March 2017

Erin, good question. I’ve gone through that decision for myself, and I have at least one client contemplating an MBA.

My own experience was this: I was in the tech industry as a tech writer, making good money in the late 2000s. But I wanted to leave it for financial planning…so I enrolled in a Master’s program, which cost $25k. And I gave up a near-6-figure-salary at the same time. So cost + Opportunity Cost = painful. I’d probably be further along financially right now had I stuck with technical writing…but I’d be miserable. And I freaking LOVE my career as a financial planner. Also, having a Masters in Financial Planning gave me so much confidence that I wouldn’t otherwise have had as a career n00b. And, of course, my business card looks more awesome now with that “MS” after my name. 😉 So, that’s the non-quantifiable part of the decision.

For expensive degrees that will help you further your current career (as presumably an MBA would), I imagine you could evaluate it along both qualitative and quantitative lines:
Qualitative: Is it going to enable you to get jobs or do things you really want, but wouldn’t (easily) get/do without an MBA? I imagine a major benefit of an MBA is the network you create. That’s really valuable, but also impossible to quantify.
Quantitative: Well, this is math. With a fair bit of guessing thrown in. Projecting your income with MBA and without MBA. This is going to be at best a good guess.

Most of all I’d recommend talking to people who do the job you want to do, or who hire people to do the job you want to do, and see what they say about MBAs. They’re the experts here.

Also, especially if you’d be quitting your job to attend a FT program, you’d need to look at your savings and spending habit. Can they sustain you through a period of no income and the costs of the degree? Can you wait longer to build up your savings? Where can you cut your spending? Because the less of a financial hit you can take to pursue the degree, the happier/less stressed you’ll be about it.

Degrees can give you so much more than just Higher Earning Power. I’m a big fan of formal education, so that’s my bias.